The Four Pillars of Investing Part 2

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Chapter 4
(pg 107)
Let's summarize the practical lessons from the first three chapters:
•    Risk and reward are inextricably intertwined. If you desire high returns, you will have to purchase risky assets - namely, stocks.
•    You are not capable of beating the market. But do not feel bad, because no one else can, either.
•    Similarly, no one-not you, not anyone else-can time the market. As Keynes said, it is the duty of shareholders to periodically suffer loss without complaint.
•    Owning a small number of stocks is dangerous. This is a particularly foolish risk to take, since, on average you are not compensated for it.
pg(108)
In other words, since you cannot successfully time the market or select individual stocks, asset allocation should be the major focus of your investment strategy, because ti is the only factor affecting your investment risk and return that you can control.

Word to the wise. If you cannot handle the down years-then you should find a reputable financial advisor. Otherwise, the emotional response will ruin your investments.


The remainder of the chapter focuses on asset allocation. For most investors the target should be a 50/50 mix of stocks/bonds. The more risk you can handle, or the more bear markets you can weather, the higher the stock allocation. The suggested maximum is 75% stock.  As you near retirement age the % towards bonds increases because naturally your risk decreases accordingly. Additionally, the bonds should be short term instruments, and remember inflation.

Step two is to diversify abroad. Why? It spreads out the risk. This portion only affects the stock portion of the allocation. Again risk and return are the guidelines, but the suggested limits are a 15% min and 40% max of your stock holdings. Regardless, stick with it through thick and thin.

Step three is size and value. large cap and small cap, value. generally putting more to the larger side with balance in value and growth, the small cap should be more weighted to value.

Step four is sectors. REIT, precious metals are the two recommendations. Everything else is covered in the S&P 500.

Conservative example includes 35% US Total Market; 10% foreign; 5% REITs; 50% short term bonds
Middle ground example includes 25% US total market; 10% US large value;10% US small value; 5% REITs; 10% foreign; 40% short term bonds
Riskier example includes 10% S&P; 10% US large value; 5% US small; 7.5% US small value; 7.5% REITs; 2.5% precious metals; 10% European;7.5% Japan and Asia; 7.5% Emerging markets; 7.5% International value; 25% short term bonds;

The Four Pillars of Investing Part 1

This is a multi part series dedicated to the review of  William Bernstein's book The Four Pillars of Investing.
Numbered Page references are from the hardcover edition.

Value = Bad Companies = higher risk = higher return
Small or Emerging Markets = higher risk = higher return

Pillar One - The Theory of Investing
Chapter 1 (the history chapter)
(pg 12)
The point of this whole historical exercise is to establish the most important concept in finance, that risk and reward are inextricably intertwined.
The low prices that produce high future returns are not possible without catastrophe and risk.
Chapter 2
(pg 44)
But if you can understand the chapter's central point-that the value of a stock or a bond is simply the present value of its future income stream-then you will have a better grasp of the investment process than most professionals.

Then comes a lot of equations of market value and discounting future value to present value. 
An annuity: You can capitalize(that is, discount) its payments by a low rate – say 6%. If your payments are $30,000 a year, this is the same as owning a long bond with a value of $30,000/0.06 = $500,000. If you are older, or it is riskier, use a higher rate, making the value significantly less.

Chapter 3 is all about how actively managed funds cannot and do not beat the market, and therefore, neither can the average joe investor. Total Stock Market indexing is the the key. Sector or selective stock picking increases risk and reward. Better performance overall with an index on the market - slow and steady and earn the boring market return.

The Ultimate Hitchhiker's Guide To The Galaxy

I just finished reading "The Ultimate Hitchhikers Guide to the Galaxy." I was a bit stunned by the ending.  But I think that most of that stems from the fact that the last half of the book reading was a bit disjointed for me.  The first half was smooth and continuous and read in a short amount of time - similar to any book I am enjoying, I devote a lot of time towards it and it is easy to become immersed in the story. 

However, my regular reading times were being interrupted and I was being distracted into doing other things. Such that when I picked up the book again it took a few minutes to re-acquaint myself with the story line.  Sometimes I was even forced to backtrack a few pages to clue me back in on what in the world, or galaxy was going on at the moment. 

Ultimately, pondering this made me wonder if this is why some people struggle with reading altogether anyways.  Unless you have a regular reading schedule, or read through a story in short order - it can be very difficult to follow and even to enjoy.  I found that my infrequent reading spells near the end also included much, much less of outbursts of laughter. Whereas, in the beginning, I was constantly laughing out loud and drawing attention to myself. 

Some of that may have been that the first few novels were a bit more entertaining, but I think it was compounded by the fact of infrequency and not following or remembering why the characters were in places as they were.  Extending this idea to mainstream public and I can think of a few good examples.  Scriptures.  Not a lot of people have really read them cover to cover. But if you draw out the process for ever and are infrequent in your reading, I can easily see how the story loses interest and distractions come or are chosen more often. However, when you are immersed in the story, it is easy to forgo anything and just allow yourself to be carried along for a few hours as you turn page after page.

Before college I was an avid reader and enjoyed spending time on the couch in a different world and completely ignoring my own world and the chores I was supposed to be doing. College ended all of that and my reading time was entirely focused on my engineering textbooks.  I was afraid, I think, to crack open a book because I wasn't sure I had the discipline or the time.  I always dreamed of the days after college when I could begin consuming the literary world once more with a renewed passion finally free of the restraints, self-imposed I will admit to some degree.

However, life after college has proven to be more difficult in renewing that passion than I had anticipated. True, I work full-time and sometimes part-time and I also have a long honey-do list and a wife and baby and a new house. However, I am also starting to think that a part of my difficulty in my renewal comes because I simply have fell out of habit and practice. I still have a long list of books that I would like to read and others that I would like to re-read from my youth. 

Returning finally to the origins of this entry - I thoroughly enjoyed reading "The Ultimate Hitchhiker's Guide to the Galaxy." It was an incredible journey and so much fun and humor. I always laughed when Marvin the depressed robot was around. I actually saw this movie a few years ago. The movie did a good job.  The ending left me wanting though. I didn't feel quite right about it, a bit unresolved and not entirely all explained properly.  I fear some of that is due to my choppy reading at the end, too.

I finally understood so many of the jokes and different things that my good friends and other engineers would say in reference to the book. It made me smile and laugh some more. I could see why it is an engineer's favorite and loved to contemplate the mysteries of the universe and the travel and the technology.  If only I could have known of this book sooner.  This has definitely been a great birthday present.

Internet Scams

Buying and selling a home can be a stressful event. Whether you decide to do it yourself or if you team up with a real estate broker. One way to do it yourself is to use Zillow.com. It is similar to the MLS but open and almost free. You can browse listed homes for free, you can even post your home and a "Make me move" price for free. Just this last week though, they started charging to actually list your home as "For Sale."

I used to have a listing on Zillow and was surprised by the number of Realtors that called me up wanting to list on the MLS with them. I had more activity from Realtors trying to get my business than I did of potential home buyers. However, I did have one interested buyer that I thought was just too good to pass up. I will post our email conversation below. The first message was sent through Zillow to me.

From Zillow:

RAPHAEL TUFOUR (raphael_tufour@yahoo..com) is contacting you about your home. Here is the message:
------
HELLO I AM INTERESTED IN BUYING THIS PROPERTY OUTRIGHTLY. COULD YOU PLEASE EMAIL ME TO CONFIRM IF IT IS STILL AVAILABLE IN THE MARKET FOR SALE. REGARDS, RAPHAEL TUFOUR
------
Please be aware that once you respond to RAPHAEL TUFOUR (raphael_tufour@yahoo.com), your e-mail address will no longer be anonymous to them.

Thanks for using Zillow.

Usually, I would have just junked this email right off. The indicators - all caps, misspellings, 'outrightly'.
But just for fun, I decided to use a secondary email account and respond.

Raphael,
This home is still available. What is your offer?

The next day he responded.

Sir,

I don`t believe in offer and counter offer. Just let me know the net/bottom price and if it is ok by me we proceed. 

Thanks

Raphael Tufour

I replied with the following in kind and mimicking his salutation.

Sir,
Compiling data from many sources I was able to come up with an asking price of $250,000.
Let me know what you think.
Thanks.

Of course the funny part was this was way more than what I had listed as my asking price. He must have liked the price, or that I was communicating because he went back on his word and countered my offer for a price that was still higher than my listed asking price, and he also went back to all caps again.

WHAT ABOUT $220,00 SIR?

Confused, I wrote back.

I thought that you said that you "do not believe in offer and counter offer."
What is wrong with $250,000? Are you trying to cheat me?

Now he was confused.

Cheat you in what way sir? How do we proceed?? What is the requirements???

Thanks,

Raphael

What 'are' the requirements. Well, I only require you to be honest in your dealings. Let's see if he can do that.

Well, if you would like to proceed with the purchase price of $250,000 then I will contact my realtor and we can begin work on getting all the paperwork in order that is necessary to complete the sale.

 He must have thought that that was okay.

I would like us to proceed.

Raphael

Turn about's fair play. Let's see what he thinks of me requesting information from him.

To begin, I will need some basic information to prepare the forms.

What is your contact information?
Where do you live?
What is your primary purpose for making this purchase?
What will be your form of payment?

We may also request a current pre-approval letter from a reputable lender.
We may also request a copy of your credit report.

Thanks.

He responded quickly - but not with information. Rather with excuses.

Thanks for your email.
I will provide the requested information necessary to prepare the forms, but please let it be noted that i am a civil servant/government official whose account is highly monitored and regulated in line with civil service bureau for code of conduct for public servants.

In line with the above and as soon as we get things fixed,my handler may be coming with the funds cash in consignment for the invesment matters as the funds may not need to go through the usual banking system until the funds arrives at your end.

Let me know what you think about this.

Thanks
Raphael Tufour

And the truth comes out. He cannot deal honestly with others. I shot back a short reply.

I will tell you what I think about this. You failed to respond to my questions.

I never received another email in reply. It was kind of funny for a while. But sobering to think about how many people still get ripped off from shady internet scammers offering a deal that is too good to be true.
Do you have a story about Internet Scams or phishing emails?  Comment below and let us know.

GPS Buying Guide

Magellan Maestro 4700

I finally purchased my Christmas present last night! I scored my gift via an Amazon Gold Box deal of the day! My parents gave us some money for Christmas and we had decided that with our upcoming move that a GPS for our car would provide useful help and lots of help navigating the East coast and all of its treasures. But which one should we get?  What GPS do you have?

We knew that, for us, we could probably find one that would do the job for near $100 or be extravagant for $200. We had a mental limit in mind of not crossing the $150 mark.

The blessing and curse of internet shopping is understanding your purchase better and the competing options. The curse is that you can very easily become mired down in the information and suffer from analyis paralysis. Making a decision is often better than not making any decision at all.

I compared the Garmin, TomTom, and Magellan brands. I used Amazon and BestBuy for most of my research. I found a very useful Magellan Comparison Chart via BestBuy. Via Amazon, you can browse nearly any Garmin Nuvi and find a section called, "Which nüvi is Best for You?" right below the Product Description and What's in the Box. I found this comparison chart very helpful in narrowing down the models I was interested in. Stylistically, the TomTom and Garmin are very different. Their approach to marketing and their user base is different although the GPS is still a GPS.

Last night's purchase was not a purely impulsive buy. We decided more than a month ago that we wanted one, and applying the 30-day rule, we found that we still wanted one. I knew last night that I wanted the Magellan brand, however, I was not as familiar model on sale as I would have liked.

When you have narrowed down your field of interest it is in your best interest to still be aware of the higher end, more expensive models so that you can spot a great deal when they go on sale. This is a fine line to walk because you have to be careful not to let yourself be overcome by feature creep.

Overall, we are excited with our purchase and we are glad that we used the 30-day rule to be sure that we really wanted a GPS. We are also happy that we could find a better model than we were expecting to purchase because of the daily deal sale price. I hope that when it arrives I can give a positive review and share some of our traveling experiences later this year.

Have you ever purchased something, or not purchased something, when it was on sale, but before your 30 days were up? Please share your dilema below.

My Favorite Deal Sites

An integral part of my frugal nature is to buy things I want on when they are on sale. I rarely pay full price on my wish list. This does two things for me. One - it ultimately leaves items on my list for quite some time. This forces me to really consider whether I really want the item, or if I just wanted it in passing one day and can really do without. Two - I end up spending less than I anticipated which allows me the freedom to buy more things on the wish list than the original budgeted amount would have allowed. This system has worked for me on numerous occasions. I am happy with the purchases that I do make and get to make more of them than I usually anticipate.

How do I do it? I browse around deal sites and keep a section of my bookmarks reserved for "Deals".

Almost daily I stop by Woot! and see what they are offering as their daily deal. The real draw for me to their site is more my daily dose of humor than for shopping for a new gadget or thing. Woot! always provides an interesting product description that can leave you smiling for hours. They run their site on the impulse buy because their deals are only up for one day. Through their continued success they have expanded into five different venues. Shirts, Kids, Wine, and a portal at Yahoo! Shopping.
In the few years I have been stopping by - I have only purchased something that happened to be on my wish list. And this has only happened three or four times. It doesn't help your frugal nature to visit if you succumb to the impulse buy temptation. I once purchased some USB hubs and they mostly gathered dust. :(

Another daily visit goes to SlickDeals. This site is forum based with user submitted material. Once a thread becomes more active it can get promoted and if the deal is 'Hot' enough it can land on the front page for all to partake. This site is a great resource for finding decent deals on all types of products from all types of stores - both brick and mortar and online versions. It can also serve as a great place to find out what you should expect to be paying for a future purchase, finding freebies like magazine subscriptions, software free after rebate, etc.

I recently picked up a cordless drill and impact drill from Home Depot because I was alerted to a special deal and rebate combination that I would not have found by browsing the store in person or online.
The greatest benefit I derive from Slickdeals after finding a deal I like is to follow the commenters. They often have extra information and tips that has proved invaluable for me.

What if you know what you want to buy and are ready to purchase? RetailMeNot is the place to visit right before you place your order. You can check for coupon codes for 10% off or free shipping codes. This has saved me a bunch of money on several occassions.

Other avenues for saving while shopping?
Microsoft is heavily promoting Bing through their generous cashback program.
Newegg is a great place to find your electronics and computer anything for great prices. Combined with Bing or Slickdeals and you will find yourself very happy indeed.
Bensbargains.net is another site like Slickdeals except each find is an individual entry and always includes a photo.
BeatMyPrice is a wonderful resource for finding the lowest price on your item.
Amazon also has joined in on the daily deals fun, too, with their gold box deals.

The thing to remember about daily deal sites is that if that item wasn't already on your wish list - you shouldn't buy it. Sales and profits are often about that unintended purchase. Just think about how many extra items you bought the last time you went to the grocery store to just pick up some eggs and milk. You came home with two more bags of stuff, right? So remember to use these links as a resource. Otherwise, you may find that you are a valuable resource to those companies who keep offering you unbelievable deals.

What are your favorite deal sites? Where have you saved the most money? Where have you fallen victim and spent more than you should? :)

I do not watch television.

I do not watch very much television. This is partly by choice and partly by circumstance. Around the time I turned 13 my parents had to put on a new roof on their house. Rather than go with another round of asphalt shingles, they chose to go with a metal roof. My parents decided to hang the TV antenna in the attic rather than punch more holes than were needed into the new roof.


I vividly recall the human radio chain we formed as my Dad made slight adjustments in the hot attic and waited to hear back from us kids watching the signal flicker in and out on the basement TV and then relaying new requests. "Oh, almost! Move it back a little! No, the other way!" In the end, out of frustration or cleverness on my Dad's part, the signal was lost and never to be retrieved. Thus ended our TV watching days.

We still watched movies from time to time, but more and more we turned to books, outside play, or my favorite - our new 386 computer. My parents have been ever grateful that my Dad was unable to restore the TV signal. They credit our good grades in school to the lack of TV in our home. I can't help but agree that he is right.

Nevertheless, a funny thing happened when I went away to college. I was living on campus with 5 other roommates in tiny apartment. In the living/dining room was a TV and I found it necessary to limit my time in that room or find myself sucked into whatever happened to be on. I discovered this as a problem when I would visit friends and find my attention drawn to the TV rather than the activity at hand. Where everyone else had seen so much they didn't think to much of it. I had not seen it in so many years I was fascinated with all the new shows that I had only heard my friends talking about on occasion.

In the end, I had to decide for myself what TV in my life would mean to me. College provided near a hundred channels on cable. When we had TV at home we only received five or six free over the air stations. Ultimately, I decided that I really enjoyed the time away from the tube and didn't feel like I was really missing out on life by choosing not to watch everything on TV.

With my detached relationship of TV I missed the whole phenomenon behind all the hit series, like "Lost" or "American Idol" or whatever. I also found TV series that followed a story to be very limiting to my freedom. I would not allow my happiness be tied to a weekly appointment at 7PM.

And then came along Hulu.com.

Suddenly, my views of television were undergoing a paradigm shift. Instead of being tied to a weeknight appointment I found the liberty offered by viewing on my own schedule. Slowly, through Hulu.com, TV regained a lost viewer.

What do I watch nowadays? I am still pretty limited in the amount of time and content, but I have settled in on just three series that I follow regularly. From the USA network - Burn Notice; Fox - House; and NBC - Life.

In another post I'll explore more about why I chose these shows.

What shows/series do you like and how has online television changed your viewing habits?